Developing Your College Savings Plan

Action Plan
1) First, figure out roughly how much you'll need to fund a college education. Based on information from the College Board, the total cost of tuition, room, board, and fees at the average public university was about $10,636 for the 2003-2004 school year, while the average private university had total costs of $26,854.

If your heart is set on sending Junior to an Ivy League school, that means you'll need to set aside more than $100,000 in today's dollars. And because college costs have been inching up by more than 5% per year (well above inflation), be sure to take future price increases into account, as well.

2) To get a handle on how much you need to save to meet your college savings goal, experiment with Morningstar's  Asset Allocator tool. Asset Allocator is a benefit of Premium Membership, but you can sign up for a free trial by clicking here.

To see how your savings rate stacks up, enter the current value of your college-savings portfolio. Then enter the amount you plan to set aside each month, as well as the number of years until the child begins college. You can also experiment with different asset mixes, ranging from aggressive to conservative. If you can afford to set aside $500 per month and are comfortable keeping most of your portfolio in stocks, the odds are pretty good that you'll be able to save enough for a new baby to attend college 18 years from now.

Even if you're getting a later start or can afford to invest only a smaller amount, it still makes sense to take advantage of compounding by investing on a regular basis.

3) Investigate your college savings options. Parents and grandparents have a wide range of savings choices, including 529 college savings plans, prepaid tuition plans, and Coverdell Education Savings Accounts. In addition, you may also gift money to a child or keep money in the parents' names. Morningstar's College Savings Center contains several articles on all of the available choices.

4) If you've decided to use a 529 college savings plan, Morningstar.com has comprehensive information on 70 different options. You'll find information on the underlying funds' performance, fees and expenses, minimum contributions, state tax deductions, and more. Click here to learn more.

5) After you've set up a savings plan, you can track performance of the underlying funds by entering them in Morningstar.com's Portfolio Manager. After entering your portfolio, you'll be able to track your holdings with several different views--including performance, gain/loss, fundamental, or customized data points--at a glance in one place, every month. Portfolio Manager can simplify your efforts to manage your college education fund. Click here to add a portfolio.

6) As your child or grandchild reaches the high-school years, keep an eye on your portfolio's asset allocation. Some 529 plans offer "age based" choices, which gradually become more conservative over time. If you've chosen to use another type of savings plan, it makes sense to cut back on your allocation to stocks several years before the child's first year in college.

Learn More: Readings
Nine Ways to Pay for College
by Sue Stevens

Five 529 Plans with Stellar Investment Options
by Paul Herbert

Morningstar's Congressional Testimony on 529 Plans
by Dan McNeela

More About the 529 Plan End Game
by Langdon Healy